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GAO calls for fund fee reports

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WASHINGTON — The Securities and Exchange Commission is "weighing carefully" a congressional recommendation that the SEC require mutual funds quarterly to disclose to investors the fees charged to their individual accounts, the SEC's chairman said.

The General Accounting Office, the congressional auditing agency, said in a July report to Congress that the SEC should draft rules instructing mutual funds to include in quarterly reports the specific dollar amount of each investor's share of operating expenses.

The GAO report was requested by U.S. Reps. Mike Oxley, an Ohio Republican and chairman of the House Commerce finance subcommittee, and John Dingell, a Michigan Democrat and senior Democrat on the Commerce Committee.

Upon receiving the report, Oxley and Dingell immediately wrote SEC Chairman Arthur Levitt, urging him to "take the necessary steps" to implement GAO's recommendations.

"We are weighing this recommendation carefully," Levitt said in the letter dated Aug. 10.

Levitt noted that GAO also urged the SEC to consider "the costs and burdens" that different alternatives would place on the industry or on investors and to consider alternative ways of making the recommended disclosure.

"We are mindful of the costs and burdens incurred by mutual funds in making such individualized disclosures — costs which, undoubtedly, would be passed on to the funds' investors," Levitt said. He said the SEC also will consult with the National Association of Securities Dealers on the issue.

Mutual fund fees paid by investors include the day-to-day costs of running a fund, called operating expenses. Also, some mutual funds charge investors sales charges, called "loads," which can be paid at the time of purchase or over a specific period or when shares are redeemed.

While the mutual fund industry has grown dramatically —from $371 million in 1984 to $5.5 trillion in 1998 — industry researchers are concerned that funds are not operating more efficiently and that fees are not declining enough.

Current disclosure practices inform investors only of the fees they are likely to incur, Oxley said upon receiving the report earlier this summer. Specifically, the disclosures only list percentages of fees and hypothetical examples in prospectuses, he added.

"Investors deserve to know exactly what they are paying for mutual fund services on a regular basis," he said. "You shouldn't have to have a degree in high finance to figure out whether your mutual fund is giving you a good deal."

Levitt agreed in the Aug. 10 letter that fees have a dramatic effect on an investor's return.

"A 1 percent annual fee will reduce an ending account balance by 18 percent on an investment held for 20 years," he said. "Mutual fund fees are extremely important to the almost 50 million households that are relying on mutual funds to finance the American dream."